Oliver and Sprung, an accounting firm, provides tax compliance and tax planning services. A recent analysis found that 65% of the firm's billable hours to clients resulted from tax planning and for many years, the firm's total administrative cost (currently $300,000) has been allocated to services on this basis. The firm, contemplating a change to activity-based costing, has identified three components of administrative cost, as follows: $\begin{array} { | l | r r | }
\hline \text { Staff Support } & \$ \quad 215,000 \
\hline \text { In-house IT charges } & 65,000 \
\hline \text { Miscellaneous office expenditures } & 20,000 \
\hline & \$ 300,000 \
\hline
\end{array}$ A recent analysis of staff support found a strong correlation with the number of clients served. In contrast, in-house IT and miscellaneous office expenditures varied directly with the number of computer hours logged and number of client transactions, respectively. Tax compliance clients served totaled 25% of the total client base, consumed 35% of the firm's computer hours, and accounted for 30% of the total client transactions.
If Oliver and Sprung switched from its current accounting method to an activity-based costing system, the amount of administrative cost chargeable to tax compliance services would:
A)decrease by $24,500.
B)increase by $24,500.
C)decrease by $114,500.
D)increase by $114,500.
E)decrease by $89,000.

Question

Oliver and Sprung, an accounting firm, provides tax compliance and tax planning services. A recent analysis found that 65% of the firm's billable hours to clients resulted from tax planning and for many years, the firm's total administrative cost (currently $300,000) has been allocated to services on this basis. The firm, contemplating a change to activity-based costing, has identified three components of administrative cost, as follows: $\begin{array} { | l | r r | } 
\hline \text { Staff Support } & \$ \quad 215,000 \
\hline \text { In-house IT charges } & 65,000 \
\hline \text { Miscellaneous office expenditures } & 20,000 \
\hline & \$ 300,000 \
\hline
\end{array}$ A recent analysis of staff support found a strong correlation with the number of clients served. In contrast, in-house IT and miscellaneous office expenditures varied directly with the number of computer hours logged and number of client transactions, respectively. Tax compliance clients served totaled 25% of the total client base, consumed 35% of the firm's computer hours, and accounted for 30% of the total client transactions.
If Oliver and Sprung switched from its current accounting method to an activity-based costing system, the amount of administrative cost chargeable to tax compliance services would:
A)decrease by $24,500.
B)increase by $24,500.
C)decrease by $114,500.
D)increase by $114,500.
E)decrease by $89,000.

Quizplus · Accepted Answer

Under the current method, 35% of the administrative cost is allocated to tax compliance services (100% - 65% for tax planning), which is $105,000 (35% of $300,000). Under activity-based costing, the allocation would be: Staff Support: 25% of $215,000 = $53,750; In-house IT: 35% of $65,000 = $22,750; Miscellaneous: 30% of $20,000 = $6,000. Total = $82,500. The decrease is $105,000 - $82,500 = $22,500, which is closest to $24,500.

Oliver and Sprung, an Accounting Firm, Provides Tax Compliance and Tax